The battered Treasury market went back into the vomitorium this afternoon after a short lunchtime recess.
Bonds extended their losses after reacting violently this morning to
remarks in Chicago. Jitteriness over tomorrow's
caused the long bond, like
ring, to get thrown completely out of its recent trading range.
The afternoon selling was attributed to a resurgence of a rumor -- first circulated in the morning -- that tomorrow's April employment report will show a 300,000 increase in
, well above the 230,000
consensus. "The market is obviously back on its heels here and expecting the worst," said Paul L. Kasriel, chief economist at
Market watchers also blamed technically driven selling for the afternoon weakness, which knocked the bond's price down as much as 1 9/32 at 1:43 p.m. EDT. Lately the price was down 1 7/32 to 92 10/32, as the yield on the 30-year bond rose 9 basis points to 5.80%.
After Greenspan's speech, a significant portion of which was devoted to ongoing concerns about the tight job market, this rumor added to the carnage in an already neurotic market. The economic community has become more willing to consider the possibility that the
Federal Open Market Committee
may move toward a tightening bias at the May 18 committee meeting, and an exceedingly strong jobs report would support that line of thinking.
"At some point, labor market conditions can become so tight that the rise in nominal wages will start increasingly outpacing the gains in labor productivity, and prices inevitably will then eventually begin to accelerate," the chairman said.
"Everybody read into it what they wanted to -- the bears read that he's hinting at a tightening bias," said Michael P. Ryan, senior fixed income strategist at
. "Tomorrow's an important number. If it's 300,000, it raises the stakes at the May 18 meeting."
Ryan believes that the bond market will take comfort in tomorrow's report if the various components, including the payroll figure and
average hourly earnings
, are in line with, or weaker than, expectations. Average hourly earnings are expected to rise 0.4%.
"If we come in with a three-handle
payroll growth of 300,000 or greater and
average hourly earnings up more than 4/10, then I have a problem," Ryan said. "It's going to be taken out tomorrow on the market. But we've priced in a lot of bad news -- we're oversold and set for a bounce-back if we get anything in line or a little weaker."
But retail investors have lately become bad news bears. These large institutions that buy Treasuries to hold bonds, rather than trade, were neutral on Treasuries for most of this year, concentrating on buying corporate and agency bonds with higher yields. But part of the problem for the market is this portion of the marketplace has turned decidedly negative during the last five trading sessions, coinciding with a 27-basis-point rise in the 30-year bond yield. Two different sources said retail selling today was heavy.
"The bulls have not been rewarded this year," said Richard Schwartz, vice president at
New York Life Asset Management
. "Those that bought expecting to see higher prices saw lower prices, and that means that investors have become less willing to buy."
The bearishness has spread like wildfire in the last few days. Unlike a bull market, when the market's proclivity is to rally on any news that can be viewed positively, the market has made a habit lately of focusing on the negative story.
report started the most recent trend, when the report's inflationary component, the
implicit price deflator
, rose 1.4%, rather than the expected 0.8%. Other releases, including the national and Chicago purchasing managers' indices and the report on
, continued this pattern.
Today, the catalyst was Greenspan's speech. In previous months, the market might have derived comfort with the chairman's detailed dissection of productivity improvements in the economy -- even though he stops short of declaring a "new era" -- and ignored his graver concerns about the tightness of the labor market.
"The headlines were kind of ominous but the speech didn't appear to be," Kasriel said. "He keeps talking about
low wage inflation. He knows it can't go on but doesn't know when it's going to end."